Global Offshore likely to Bounce Back with Petrobras Contracts

The company’s stock is trading at a P/E of 7.7 on a consolidated basis

Mumbai-based Global Offshore Services has heavily underperformed the market in the past one year due to a bad first half of FY12. With two of its vessels commencing high-value contracts with Petrobras, the scene will improve from the December quarter onwards. Global Offshore faced higher costs without matching revenues in June and September quarters on relocation of two of its vessels to Brazil on the Petrobras contracts. As a result, Global Offshore’s consolidated earnings for the first half of FY12 dipped 63.4% to . 3.6 crore.
Both these contracts have since commenced at rates that are substantially higher to the rest of GOSL’s fleet. At $24,000 per day and $30,000 per day, respectively, their earnings would be more than twice the average earnings of theremaining nine vessels. Similarly, these vessels would also earn a higher profit margin and improve the sagging bottomline in the coming quarters.
The company has 11 vessels — five anchor-handling tugs (AHT), five platform-support vessels (PSV) and one barge — that support the offshore petroleum exploration industry. Four of these vessels are in wholly-owned subsidiaries in Singapore and the Netherlands.
The Singapore subsidiary has sold its vessels to financial institutions and taken them back on long-term bare-boat charters to reduce the strain on balance sheet. The company has sold its older assets from time to time to improve the overall age of the fleet.
Today, except one, all the company’s assets are less than five years old. It has also placed a $48-million order for a PSV to be delivered mid-2012.
Five of the company’s assets will complete current contracts between May and November 2012 and will be available for redeployment. The company’s ability to secure higher day rates will be another positive for its earnings.
The company’s debt stood 2.7 times its equity on a consolidated basis at end-September 2011. This may be on a higher side, but the company has sufficient cashflows to take care of its debt obligations. The scrip is trading at a price-toearnings multiple (P/E) of 7.7 on a consolidated basis, which appears to capture a part of the future earnings growth. 

PETROLEUM INDUSTRY: Under-recovery in Q3 to Make Matters Worse

The cost of India’s imported crude oil has reached a historic high level on the depreciating rupee. As retail prices remain controlled, the money that India’s state-run petroleum retailers are losing has gone up at a dizzyingly rapid pace. These three companies — Indian Oil, BPCL and HPCL — are already neck-deep in debt and badly in need of compensation from the government.
In December 2011, India’s average cost of imported crude oil stood around . 5,673 per barrel — 8.2% higher since April 2011 — although in dollar terms, the price of India’s crude basket eased 8.7% to $107.9. According to the data published by the Petroleum Planning and Analysis Cell (PPAC), in the last week of December 2011, India’s cost of import stood at. 5,683 per barrel — surpassing the earlier peak of . 5,675 in July 2008, when oil prices had reached $147.
As the import cost reaches a historic high level, it is no wonder then that retailers are losing heavy money. The industry, which lost money at the rate of . 235 crore per day during the second quarter, is losing . 388 crore every day in the second fortnight of December — a jump of 65% in three months. The industry is expected to report total under-recovery of . 30,000 crore for Q3, which will be 40% bigger than the September 2011 quarter. The total under-recoveries had fallen to . 21,374 crore in the September 2011 quarter from . 43,526 crore of June 2011, thanks to decontrol of petrol and reduction in taxes in the last week of June. The heavy under-recoveries have put the cash flows of the oil marketing companies under strain. The borrowings of all these three companies have jumped nearly 48% in the last 12 months to . 129,283 crore at September 2011. In the first six months of FY12, these companies have been borrowing at an average of . 180 crore per day. Their debt-to-equity ratio has worsened to 1.7 for Indian Oil, 3.0 for BPCL and 5.1 for HPCL. Similarly, the combined interest burden of these three OMCs has zoomed up 93% in the first half of FY12 to . 3,877 crore.
As the rupee continues to depreciate, the urgency grows to find a lasting solution to the subsidy problem. Meanwhile, the sector remains highly unattractive to retail investors, as the government appears paralysed by its political compulsions and lack of economic leeway. 

Vinati to Gain from $-linked Contracts

In FY12 and FY13, co plans to invest . 150 crore

The Mumbai-based specialty chemicals maker Vinati Organics is investing heavily in expanding capacities and adding new products, which will drive its profitability growth in the next two-three years. Although, the scrip has fallen to its 52-week low, it has outperformed the BSE Sensex over the past one year. The economic weakness in the western countries is leading to an increase in outsourcing activity in manufacturing of specialty chemicals. Vinati Organics derives 89% of its revenues through US dollarlinked contracts at a time when the rupee has depreciated over 20% in the past five months. This, in turn, will prove to be positive factors for the company’s bottomline in the coming quarters.
Vinati Organics has enjoyed a high-speed growth in the past few years. Its net profit grew at a cumulative annualised growth rate (CAGR) of 93% between FY06 and FY11, while the revenues grew at 41%. In the first half of FY12, however, the company faced stagnancy due to a variety of factors. Sales of its IBB were low due to competition, isobutylene plant was running at sub-optimal capacity and expiry of sops increased tax burden. The things are, however, back to normal now.
The company has been investing heavily of late. Between FY09 and FY11, it doubled its gross block to . 149 crore, which will again double by end FY13. However, its debt-equity ratio has declined steadily to 0.56 at end September 2011, thanks to high profitability and healthy cash generation. Vinati Organics is the world’s largest producer of IBB — a chemical, which is the raw material of widely-consumed pharma drug ibuprofen. It is also the largest producer of ATBS — a monomer used in oil extraction industry. Thanks to backward integration, it has also built India’s biggest isobutylene plant. The company is now adding more specialty chemicals to its portfolio, catering to industries such as pharma, agrochemicals, oil & gas, among others.
In FY12 and FY13, it plans to invest . 150 crore, which will double ATBS capacity to 24,000 tonne apart from adding products such as Diacetone Acrylamide (DAAM), High Purity Methyl Tert Butyl Ether (HP MTBE) and Di-Ethyl Aniline (DEA). Most of these additional plants will commence operations by July 2012. Due to the weakness in the overall market, the scrip is currently trading at a price-to-earnings multiple (P/E) of 6. Its beta — a measure of volatility — to Sensex is around 0.36 for the past 12 months, indicating a stable stock.

Coal India: Govt Looks to Cash in on Rich PSUs

May ask cos to buy into each other or pay special dividends

India’s leading state-run companies are sitting on a mountain of cash, attracting the attention of the finance ministry that is struggling to meet its deficit-cutting target as a slowing economy has hit revenue collections. The country’s top 10 PSUs have cash of $26 billion, or . 137,576 crore, on their books, prompting demands from their dominant shareholder that they should either buy part of the government stake in each other, buy back their shares, or pay special dividends. Lending urgency to these demands is the postponement of follow-on offers by PSUs such as ONGC because of choppy market conditions. The government had targeted . 40,000 crore from disinvestment this fiscal. But this attempt to nudge PSUs to buy stakes in each other, known as cross-holdings, has met with opposition from both company managements and the administrative ministries that control them.

CILTops List 
They argue that in a growing economy, the cash pile is better spent to expand capacity.
But an analysis by the Economic Times Intelligence Group (ETIG) shows that operating cash flows far exceed investments by PSUs, rendering this argument doubtful.
The top cash-rich PSUs, which include Coal India, the monopoly miner of coal, and exploration companies ONGC and Oil India, collectively earned . 52,232 crore in FY11 through operating cash flows while they invested just . 20,103 crore. Coal India (CIL), which had more than . 53,600 crore (over $10 billion) of bank balance at the end of September this year, tops the list, followed by ONGC, NMDC, Oil India and BHEL. Current cash flows also appear to be enough to fund future capital spending or expenditure on machinery and expanding capacity, the analysis by ETIG indicates.
However, Saurabh Mukherjea, head of equities, Ambit Capital, says any policy adopted by PSUs should be consistent and not send a conflicting signal to the investors and the market. His point is that there are PSUs in sectors such as power, coal and gas where the capex requirements are huge and, therefore, the cash surplus generated by them could be utilised by these firms. There are also other PSUs such as Engineers India that may not have huge capex requirements but generate surplus cash. Such companies could be candidates for a potential buyback programme, he says. Mukherjea says unless the government announces a clear cash utilisation policy, it would sound opportunistic on its part and send a wrong signal. Amit Tandon, founder and MD of Institutional Investor Advisory Services, a firm that provides research and data on corporate governance, is also against the idea of dipping into the cash pile of state-run companies given their capex plans. " If private corporates were to do that, there would be an uproar and the market would react adversely," he says. 

CAPEX PLANS Coal India plans to invest about . 30,000 crore in the 12th Five-Year Plan (FY13-FY17) in its own business apart from acquisitions. This means it will invest . 6,000 crore annually on an average while in the last five years, the company had annual operating cash flows of . 9,000 crore. In other words, the company’s annual capital expenditure plans can be easily funded through its annual cash flows. Similarly, in the case of ONGC, operating cash flows have consistently been higher than its annual capital expenditure during the past five years. Although the oil exploration firm has aggressive capital expenditure plans for the future, its operating cash flows should be adequate to fund them. At the end of September 2011, ONGC had a cash balance of . 27,000 crore. Another state-run exploration company, Oil India, also generates enough cash every year to cover its capex plans. It will invest . 3,180 crore in FY12, which includes acquisitions, if any.
    

GAIL INDIA: Expansion Drive to Consolidate Position at Top

India's premier gas transporter is gearing up for bigger things. And it is spending big to fuel those plans. While there are some concerns over gas volumes, Gail is still a good bet in a turbulent market.

Astable business, government parentage, strong balance sheet and low valuations make Gail India a good defensive bet in the current turbulent market conditions. The company's expansion plans will hold it in good stead once concerns over availability of domestic natural gas ease. 

BUSINESS The company is India's largest natural gas transporter with 8,700 km of pipelines and capacity of 175 million metric cubic meters per day (MMSCMD). It is no wonder then that Gail has been affected the most by the ongoing stagnancy in domestic natural gas volumes. With Petronet LNG's Dahej terminal working at almost full capacity, further growth in volumes has been a concern weighing on Gail's market valuation.
After the setting up of the Petroleum and Natural Gas Regulatory Board (PNGRB), the company has had to adjust its transportation tariffs to the regulator's norms. The company also has to share a part of the under-recovery burden of the oil marketing companies. Both these things have added to the pressure on the company's valuation due to the uncertainties involved.
Gail transports more than 70% of India's natural gas. It owns and operates India's largest pipeline -- the 2,300 km long HBJ pipeline -- connecting Hazira on the western coast to Delhi in the North. It also produces around 0.42 million tonne of polyethylene and 1.4 million tonne of LPG.
The company also has stakes in 27 petroleum exploration blocks, six of which have reported hydrocarbon discoveries. In September 2011, the company bought a 20% stake in Carrizo's Eagle Ford shale acreage in the US where it will invest $300 million over the next five years.
It is also one of the promoters of Petronet LNG and seven city gas distribution companies including Indraprastha Gas. It plans to enter city gas distribution (CGD) business in around 50 cities within the next three years. 

GROWTH DRIVERS A few of Gail's immediate concerns are likely to be resolved soon. The PNGRB norms that assure a fixed rate of return on new pipelines will mean the company's average tariff would steadily go up as it commissions more pipelines.
Since Gail shares the under-recovery only on LPG, there may not be any significant growth in its overall burden, even though the industry's overall under-recoveries for FY12 jump due to a weaker rupee. 
The company's gas volumes could see some growth in FY13 after the LNG import terminal at Dabhol is commissioned by mid-2012 and the one at Kochi by end-2012.
Gail is gearing up for an increase in domestic gas supplies in the long term and is working on five major new pipelines and upgrading two existing ones. Last year it disclosed a mega capex plan of 29,000 crore by FY13 to double its natural gas transportation capacity and also double its ethylene capacity. Its 70% subsidiary Brahmaputra Cracker is set to commission its 0.28 million tonne per annum plant by mid-2012. 

FINANCIALS Gail posted steady growth in its net profit growth of 14.8% to 2,079 crore in the first half of FY12, while revenues were up a healthy 22.1% at 18,566 crore.
The company lost its debt-free status on a net basis in FY11 as its standalone debt surpassed its cash & bank balance. This was on account of the company's borrowing plans to fund its capex plans. 

VALUATIONS:
Gail is currently trading at a priceto-earnings multiple (P/E) of 13 based on standalone profits for last four quarters. Assuming the company is able to maintain its earnings growth in the first half of FY12 in the full year, its consolidated net profit would stand at 4,623 crore, which will discount the current valuation at 10.7 times.

The company shed its debt-free status last year thanks to aggressive investment plans

LNG: High Japanese Appetite to Hit Spot LNG Supply

High Japanese demand keeps spot LNG prices high, which remain just below the crude oil on energy equivalent basis. As the winter sets in the northern hemisphere a further boost in demand and prices could render LNG unviable for Indian importers. Indian natural gas players could see a dip in volumes in such an event.
Japan’s imports of LNG have grown substantially since the Fukushima nuclear disaster in March ’11. Today, nearly 80% of the country’s nuclear power capacity is offline and the power companies are trying to make up the shortage through LNG and coal.
Japan is approaching its winter season, with power demand peaking from December to February. The colder weather has a direct impact on kerosene, fuel oil and LNG consumption for power and heating.
According to the Federation of Electric Power Companies, Japan, the LNG imports of top ten power companies grew at 28.3% in October and November 2011 after growing at 21.3% in the April-September period. The total imports stood at 34.6 million tonne for the April-November 2011 period — up 23% against year ago.
Higher imports by Japan have directly impacted the availability of spot LNG cargos and boosted prices. The spot LNG prices in Asia have moved up from around $16 per MMBTU in September 2011 to $17.5 in December. While in the same period, the benchmark Brent crude oil prices have marginally eased from $113 to $106 per barrel. As a result, on an energy equivalent basis, the differential between spot LNG and the crude oil prices has narrowed to just $1-1.5 from $3-3.5 a couple of months ago.
Industry experts fear that if the situation were to worsen from here on, Indian consumers could find liquid fuels cheaper to the imported natural gas. The result will be a reduction in India’s LNG imports — at least temporarily — that can impact revenues of companies such as Petronet LNG and Gail.
Things may not be too bleak at present, with South Korean LNG demand going down substantially of late. Platts, the leading energy information provider, noted that the country’s LNG imports fell 35% in November to 2.32 million tonnes due to inventory buildup. Media reports suggested Japan could face a similar inventory glut in January — there was a 1.8 million-tonne differential between the LNG purchased and consumed by Japan’s power companies till November ’11. Any easing of LNG prices will be a great relief for Indian companies in the natural gas sector. 

New Products, Higher Capacities to Drive Balaji Amines Earnings

Co’s consistent history of positive cash flows may help it bring down debt

Specialty chemicals maker Balaji Amines is investing heavily in higher capacities and new products. All these projects will be operational in phases next year and add to the company’s FY13 earnings. The company should, however, ensure that the rising debt burden and interest costs do not weigh on its performance.
Balaji Amines is India’s largest producer of specialty chemicals ethyl and methylamines and their derivatives. A shortage in the global market leading to a price rise in its main product boosted the company’s September ’11 quarter profit margin to 20.1% — the best in the past two years. Its net profit at . 10.6 crore was the best ever for any quarter.
At present, the company is tripling the capacity of its methylamines plant and adding two derivative products at a capital cost of . 60 crore. These three units will commission between January and July of 2012. The company will become the biggest producers in India of the two derivatives — dimethyl formamide and dimethyl hydrochloride — and replace current imports. Balaji Amines is also setting up a 100-room 5-star hotel on its land in Solapur with . 50 crore of capex to be completed by end 2012.
The company’s expanded capacity of specialty chemical NMP remained under-utilised in the first half of FY12 due to raw material shortage. It expects approvals from USFDA and EU authorities for its product PVPK 30, which is used as a binder in tablets. The approval and better utilisation of NMP plant will also add to FY13 revenues and profits.
While the company pursues aggressive growth options, it needs to mind its debt burden. The company ended September ’11 quarter with a debt of . 158.6 crore and debt-equity ratio near 1. Its interest burden in the first half of FY12 at . 9.8 crore was up 78% against the year ago period. The company will be funding the ongoing capex of . 110 crore with . 73 crore of debt, which will increase its debt pile. However, it has a consistent history of positive cashflows from operations, which will be key in paying down the burden in future.
In the past one year, the scrip has fallen around 6% against a 15% drop in the BSE Sensex. It is currently valued at 4.3 times its earnings for the past 12 months with a beta of 0.65, indicating less volatility as compared to Sensex.

CRUDE OIL: Low Inventory and Iran to Keep Oil Prices High

With Europe as well as the US facing economic slowdown, Libya recommencing its oil production and International Energy Agency (IEA) slashing its global oil demand forecast, it may seem oil prices are bound to crash. However, prices have refused to ease. This means the world has come to acknowledge the oil industry’s supply-side risks.
As dark clouds gather over large western economies, the growth in crude oil demand is expected to slow down. IEA, which advises industrially-advanced countries (OECD nations) on energy-related issues, has slashed its demand forecast for 2011 to 0.9 million barrels per day (mbpd) in November 2011 from 1.4 mbpd in January 2011. The Libyan crisis has also got over recently and the country’s oil production has rebounded quickly in the past few weeks. From an average 75,000 barrels per day (bpd) in September, it rose to 350,000 bpd in October and 500,000 bpd by early November, with an expectation that it shall rise to 700,000 bpd by end-December.
These factors have not sufficed in taming international oil prices. In fact, the fall in October was quickly reversed and Brent crude oil is back at around $110 per barrel level.
The reason is that there are genuine supply-side concerns. The oil production from Organisation of Petroleum Exporting Countries (Opec) has consistently remained below what they should produce to fully meet global demand. The result is, there is a global drawdown in oil inventories. The 11.8 million-barrel fall in inventories of OECD nations in September took the inventory level below five-year average for a third consecutive month — something that has happened for the first time since 2004. Preliminary data suggested another 34 million barrel fall in stocks in October.
Even at the reduced demand estimate of 90.5 mbpd for 2012, Opec will need to ramp up its production from the current level to 30.4 mbpd to fully meet world demand. The upcoming meeting of Opec ministers on December 14 in Vienna is unlikely to take any decision on this issue due to pressure from price hawks — Iran and Venezuela.
In addition to these minor concerns, Iran’s nuclear ambitions pose a grave risk of sudden supply shocks. With its current 3.5 mbpd oil production and control over the Strait of Hormuz — the most important oil transit channel in the world — Iran holds the potential to cause significant supply disruption. Recently, the European Union expanded a sanctions blacklist against Iranian firms and individuals and warned it was considering extra measures against Iran’s financial and oil sectors. In verbal retaliation, Iranian authorities predicted doubling of oil prices in case of sanction on oil.
As the world acknowledges dangers posed by these potential challenges to global crude oil supply, oil prices refuse to bow low. A country like India, which heavily subsidises petroleum consumption of its people, will be at a greater risk to face any sudden spike in oil prices. 

PRAJ INDUSTRIES: Co Diversifies to Cut Risk & Fuel Growth

Praj Industries is tapping new growth avenues in related areas to cut dependence on its core ethanol business

After losing two years to bad business conditions ethanol solution provider Praj Industries has made a comeback in the first half of FY12. The company is tapping a number of new growth avenues to bring down dependence on the ethanol business. As business conditions for its core business improve and the new businesses achieve critical mass, Praj could be back in favour with the market.
BUSINESS Pune-based Praj Industries is among the world's top 5 engineering and technological solution providers for fuel, industrial ethanol and breweries. Many countries across the world have mandated ethanol blending with gasoline, which has increased the demand for ethanol plants.
The company derived 51% of its FY09 revenues from its international business, which dropped to 30% in FY11.
GROWTH DRIVERS The company has now diversified into a few related businesses. In Kandla, it has set up a facility to contract manufacture heavy engineering goods for third parties. It has also started taking up projects in treating industrial waste water or zero liquid discharge plants. It is setting up a unit at Jejuri, Maharashtra, to manufacture bio-consumables.
The company was hitherto undertaking all these activities only for its clients in the ethanol and brewery industries. It has now decided to leverage these capabilities to cater to other companies as well. Its orderbook stands at 900 crore to be executed in one year. This is 1.5 times its revenues of FY11 and gives visibility to growth.
The company plans to grow its non-ethanol business to 25% of total revenues by FY13. Praj is undertaking intensive research for a break-through technology to develop a commercially-viable cellulose-toethanol technology.
FINANCIALS After growing at almost 50% annually between FY04 and FY09, the company's performance was hit by the global economic turmoil. For two consecutive years the company's sales fell to touch 552.9 crore in FY11.
The company's revenues at 393.2 crore in the first half of FY12 were double that of the corresponding period last year. Net profit was 77.6% higher at 34.2 crore.
As at September 2011, it had cash & bank balance of 460 crore with no debt.
VALUATIONS: Praj Industries is currently trading at a price-to-earnings ratio of 20.3 on profits for the trailing 12 months. Its priceto-book-value ratio stands at 2.3 times. More than one-third of the company's market capitalisation is represented by its cash and liquid investments.

SHREE RENUKA SUGARS: Bad Weather, Weak Re Add to Woes of Company

Shree Renuka Sugars has fallen to one-third of its value from a year ago after its dismal September 2011 quarter results.
The company appears to battling bad weather, adverse government decisions, a weakening rupee, faltering economic growth and an over leveraged balance sheet. While sorting out these issues will take time, the company is now taking steps to reduce its debt pile. But it will take a while before the stock can regain lost ground.
The September 2011 quarter saw the company post its first-ever loss since its listing. The loss, at . 615.9 crore at the consolidated level, equalled profits for nearly six preceding quarters, leading to the company losing almost 40% of its market capitalisation in a few days.
The main blow came from the appreciation of US dollar leading to a forex loss of . 570 crore. This was mainly in its Brazilian subsidiaries, which have a debt of $485 million, apart from trade advances of $117 million.
Even excluding these forex losses, the company had a consolidated loss of . 46.1 crore, mainly due to operational problems. Its subsidiary in Brazil, Renuka Do Brasil, were hit because of exceptionally dry weather and two instances of frost in the state of Sao Paulo which resulted in a heavy drop in sugarcane yields. Lower production of sugarcane raised the cost of raw materials and also led to under-utilisation of plant.
After its two acquisitions in Brazil last year, the company’s balance sheet health has deteriorated. Its debt-to-equity ratio rose from 2.8 last September to 4.1 at the end of September 2011. Interest cost, too, jumped nearly three-fold in the last 12 months adding to investor concerns.
In the near term, there may not be a major improvement. In India, higher sugarcane prices are going to add to costs. The government’s decision to allow one million tonne of exports boosted local sugar prices. However, that will be shortlived considering that this move weakened global prices. Similarly, domestic crushing will soon start in full swing which will increase supply.
Brazil too will take two seasons to reach full utilisation levels. It is, however, taking steps to sell a part of its co-generation assets in Brazil to prune its debt. While it attempts to further clean up its books, the company will have to wait for overall market conditions to improve.